country with a huge amount of poverty and inequality owing to the fact that a large share of unemployed, elderly, and disabled people receive little to no income. Then that country creates unemployment, disability, and old-age benefit schemes funded by taxes on labor. As a result of these new schemes, poverty and inequality plummet. Was this inequality reduction achieved by welfare state redistribution or by pretax predistribution? Based on normal understandings, clearly the former. Yet Blanchet, Mogstad and, by endorsement, Lazardi use odd accounting specifications to say it’s the latter.
Regarding (b), this is just factually false. In the United States at least, state and federal income taxes are assessed net of employer-side payroll taxes but not net of employee-side payroll taxes. Blanchet’s decision is also clearly not a quirk of payroll tax administration. As I noted in my piece, in Denmark, which has no payroll tax, Blanchet actually takes some of Denmark’s income tax and declares it to be a social insurance contribution as part of his accounting exercise.
Not counting employer-side payroll taxes as redistribution is also obviously indefensible. In Sweden, those taxes are 31.42 percent of gross pay, which is effectively a 23.9 percent flat tax, on all labor income with no cap. In the United States, the same taxes are 7.65 percent of gross pay, which is effectively a 7.1 percent tax, on all labor income up to $176,100 of income. For labor income beyond $176,100, the tax falls to 1.45 percent of gross pay, which is effectively 1.43 percent. Baking these taxes into your pretax/market/predistribution baseline, as Blanchet does, makes it so that the inequality reduction achieved by Sweden’s much more aggressive tax approach is not counted as redistribution at all.
Put differently, if the United States tripled the employer-side payroll tax while eliminating the cap so the higher tax applied to all income, Blanchet’s specification would score the resulting inequality reduction as “predistribution.”